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US taxation of foreign source income

Despite much online digging I haven't been able to come up with straight answers for what should be fairly simple questions regarding US taxation of foreign source income.

1) A US client owned a piece of property in France that was purchased in 1966 for francs, gifted to him in 1997 (presumably at the same basis as the original gifting purchaser's), improved in 1999 for francs, and sold in 2010 for euros. Question: is it appropriate to do the euros-to-dollars translation for all the component figures at the rate for the sale date (when the gain would be recognised) or should I translate each franc/euro component to dollars separately as of its transaction date and then compute the gain using the resulting amounts?

2) Another US client worked in Italy for an Italian employer for 3-1/2 months in 2010 (and 2-1/2 in 2011). [I'm assuming that I need to translate each of his paycheques from euros to US$ as of its date, not on a cumulative basis at 12/31/10 (unless one of you knows differently).] He had several types of tax withheld from his earnings: IRPEF (income tax), INAIL (workers comp) and IVS (pension). Which of these is/are eligible for the foreign tax credit (line 47)? [Note: the client is a US citizen who maintained and returned to his US tax home and did not attempt to establish a foreign tax home during this temporary assignment.]

Any insights, or directions of where else to look, any of you have would be greatly appreciated.

Reply to
David Samuel Barr
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1 - No. The exchange rates are different for the two dates. You use the exchange rate for the date in question.

I am not commenting on 2 since I don't know the answer.

Reply to
parrisbraeside

The value of the gift in 1997 is the larger of FMV at time of gift and the cost of house (value in 1966). You will have to look up the exchange rate to US dollars for each date to do the calculation. The improvement in 1999 adds to the cost basis, but once again the US dollar exchange rate is different.

formatting link
only goes as far back as Jan/1/1990, and yes they do have French francs.http://www.federalreserve.gov/releases/h10/hist/dat89_fr.htm only goesback to Jan/4/1971.

When I do the conversion for my own return I use the typical cash rate, not the interbank rate.

It looks like you may use an average exchange rate for the entire year. At

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0524,00.html they have a link at the bottom of the page to Yearly Average Currency Exchange Rates. This suggests that you can use it. I've used this method on my own tax return because it simplifies a lot, as you have so many interest and dividend payments throughout the year. But as you have only a few paychecks to deal with, you can do the exact calculation and pick the version that yields fewer dollars.

Income tax qualifies for the FTC. Pension does not as he will receive the pension back at a later date. INAIL might be deductible on Schedule A.

Reply to
removeps-groups

Isn't the important thing to know the cost basis of this gift?

Reply to
Arthur Kamlet

You're right. The cost basis in inherited. So the cost basis is the donor's adjusted cost basis (cost + improvements) in 1966.

However, we also need to know the FMV of the house at the time of the gift (in 1997). This is because of the complicated rules for gifts. If the value in 1997 was more than in 1966, the cost basis is value in

1966. But if value in 1997 was less, then cost basis is either the value in 1966 or 1997, depending on whether the house is ultimately sold at a gain or loss.

Also if any gift tax was paid by the donor in 1997, then the cost basis of the house is increased by a fraction of this gift tax.

And if by gift the original questioner means inheritance from a foreign person, then the cost basis of the house is the adjusted cost basis in 1997 at the time of gift.

Hope I have it right this time!

Reply to
removeps-groups

Thanks for everyone's help in this thread.

On the French property, here's how the actual numbers run:

1966 Purchase price 55,000 FF ( 8,385 euros) 1997 FMV at gifting 227,500 FF (34,682 euros) 1999 Capital improvement 18,090 FF ( 2,758 euros) 2010 Sale price 333,733 euros

As I understand it, since this was an inter vivos gift, not an inheritance, the cost basis to the donee is the same as that of the original purchaser, and a stepdown to FMV doesn't apply here since the FMV at gifting far exceeded the original cost. (I'm also pretty sure that no US gift tax was paid by the donor in 1997, since she was/is a French resident/citizen, so that shouldn't affect the basis.) At the time of sale, the cost basis is the passed-through purchase price plus the capital improvements. Right?

In that case, I'm looking at a euros gain of

333,733 - (8,385 + 2,758) = 322,590

If I translate this to dollars as of the date of sale in November, (1 euro = $1.39438) I get

465,351 - (11,692 + 3,846) = 449,813

But if I have to translate each transaction as of its date, I get

465,351 - (9,536* + 3,219) = 452,596

(* I can't find an online converter that goes back any earlier than 1990, so just for this example I've used

1/1/90's rate)

Admittedly, the difference isn't major (2,783), but the second method still produces a higher tax for the client (who gave me the numbers with his own calculation of the $ capital gain based on the first method), so if I'm actually supposed to use the second method, I'd like to be able to point to something in the Code or Regs that dictates that method over the first one.

Reply to
David Samuel Barr

The euros gain is irrelevant. You need to convert each value directly to dollars on the date in question. The initial purchase price is converted to dollars using the French Franc - USD exchange rate in 1966. The other amounts are converted using the appropriate Euro - USD exchange rate. You calculate the taxable gain directly in dollars, not in euros.

Ira Smilovitz

Reply to
ira smilovitz

I agree with Ira. Everything must be converted to US dollars. A link I posted above goes back to Jan/4/1971. I did a search in bing for

exchange rate usd "french franc" 1966

and got

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is "Foreign Currency Units per 1 U.S. Dollar, 1948-2009".Evidently in 1966 the exchange rate was 4.9371.

as the donors cost basis as it was always goes up in value.

If this was a rental then depreciation recapture is involved.

Reply to
removeps-groups

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